CGT Changes and the Law of Unintended Consequences

20 November 2018

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A few weeks have now gone by since the Chancellor’s budget. The absence of any articles on the new measures affecting CGT on divorcing couples is quite concerning. Under proposed changes, which were not mentioned in the chancellor’s speech, if you have separated and elected to move out of your home because of the breakdown in your relationship, you will potentially be hit by a capital gains tax bill. This is unless you can sell or otherwise dispose of your interest in that property within nine months of moving out. Such changes are to take effect from April 2020.

Explaining CGT and divorce right now

Currently, the sale of a property being your principal place of residence is exempt from CGT. There is also no CGT liability between spouses who are living together on transfers. However, as soon as you separate and one party vacates the matrimonial home then this will no longer be classed as your principal place of residence. The rules as they currently stand give you an 18 month period in which to address these financial issues, being a more realistic time frame for resolving your overall finances on divorce.

The CGT changes set to come into play

Then, the new rules require any transfer or sale of that property to be effective within a nine-month period. Failing which, such activity will be classed as a transfer at market value. And it may attract a Capital Gains Tax liability – if a gain is made. These changes are set to increase strife and potential undue pressure among divorcing couples at a time when the government is supporting plans for no-fault divorce. Lucy Frazer, the justice minister, pledged in September that the “no-fault” reform was on its way. This will make it possible to get a divorce without having to blame a partner. This is a change many family lawyers have lobbied for, for decades. This may be why the chancellor swerved any such mention of this tax change affecting divorce in his speech!

What the CGT changes mean

Under the new regime, the time may not be sufficient for divorcing spouses to settle the legal and financial aspects of a marriage breakdown. The current process is that parties seek legal advice – usually at some point either before or shortly after separation. If parties are unable to agree on a settlement themselves then a referral to mediation may well be deemed appropriate. Alternatively, lawyers may try and seek voluntary disclosure of each parties’ finances, so as to facilitate a negotiated settlement. However, if one party fails to cooperate with this process then proceedings will need to be issued. This is so the matter can be adjudicated upon by a court. If a case goes to trial, there may be a delay of nine months. The proposed change simply fails to give parties sufficient time to resolve matters and avoid the CGT time trap. This in itself may force divorcing couples to seek to instigate a court process from the outset. This will be to ensure a swift and timely conclusion to avoid this potential cost, which otherwise would not have to be met.

Consequences of the changes

Unfortunately, this could cause huge distress at a time when a property market slowdown is leaving many family houses unsold for months. Even years! This may also result in more couples being advised to stay put in the family home. Of course, this may add to the tension between the parties and potentially expose their children to the ongoing conflict. Alternatively, more applications for occupation orders to evict one party from the family home will appear. All contrary to what the government has tried to achieve within the family law arena for years. And even more so, when the government is preparing for the legislative changes to introduce ‘no-fault’ divorce. As the title to this blog states: the law of unintended consequences.

However, the taxation implications don’t stop there. Tax experts, such as Lindsey Kutten of PWC, the accountancy firm, say that some couples who have split up may be faced with a double tax whammy. There will be a CGT bill if they cannot find a buyer for their family home or a financial settlement within a nine-month period. If one buys another property within that period, they will also be compelled to pay the 3% second-home stamp-duty surcharge.

What you need to know

It is, of course, important to point out that each individual has a CGT allowance of £12,000 per annum. This is by the time the rules take effect and if the house is in joint names. Then, the liability will only accrue on 50% of the gain. Additionally, if you do purchase a second property as your new home, incurring the SDLT liability, then subject to certain criteria, you may be entitled to claim this back once a settlement has been achieved.

Importantly, you must remember this applies to divorcing couples. There have been many reports about the lack of cohabiting rights protecting couples who simply live together. However, perhaps where the unmarried couples can have 2 main residences (no additional SD or CGT) and let one out from time to time, assuming they have the money, cohabiting couples don’t want the changes in legislation that are being sought. Although perhaps that’s another blog for another day!

Seek legal advice as soon as you can

The crux of this is simple: it is important you seek proper legal advice from the outset. This is so all issues can be raised as soon as possible, thus enabling you to make properly informed choices as to the steps you wish to take in separating and how and when you seek to achieve this.